Estimated Payments/Timing

[rayvt]

Interesting....
So, as long as your tax is characterized as withholding from an IRA, the loophole is that it doesn't show when during the year it was withheld on the 1099, so you can just do it in December?

It's not really a loophole.

The IRS specifically states that withholdings are deemed to be timely payment of your estimated tax, regardless of the date of the withholding.

AFAIK, the only place where you can make a one-time large amount of a specific amount of income and have it all go to withholding is an IRA withdrawal.

 

[Perryinva]

I don’t need to make quarterly payments as I have a monthly pension with withholding. I was just concerned with after tax payments of taxes on my December Roth conversion. I just read about the method to pay the tax via a 100% withholding of a separate tIRA withdrawal with roll back by paying it back within 60 days with after tax funds. I like that. This way, there are forms from Fido with everything documented, and I directly choose the amounts for F & S IT. I just have to see what is involved with the roll back through Fidelity. Since many have already done this, it should be no big deal.

 

[Cobra9777]

I don’t need to make quarterly payments as I have a monthly pension with withholding. I was just concerned with after tax payments of taxes on my December Roth conversion. I just read about the method to pay the tax via a 100% withholding of a separate tIRA withdrawal with roll back by paying it back within 60 days with after tax funds. I like that. This way, there are forms from Fido with everything documented, and I directly choose the amounts for F & S IT. I just have to see what is involved with the roll back through Fidelity. Since many have already done this, it should be no big deal.

Yes, the transactions for this on Fidelity are no big deal. Do a regular tIRA withdrawal, but specify 99% withholding. So, 99% of the withdrawal goes directly to the US treasury, and an annoying 1% goes to whatever taxable account you specify. Then, within 60 days, transfer the entire amount of the withdrawal from your taxable account back into the tIRA, to make it whole again.

When your 1099-R arrives, it will show the gross distribution and withholding, with a box checked that says "Taxable amount not determined." In TurboTax, specify that you paid back the distribution as a rollover. It will reduce your gross distributions accordingly and print the word "ROLLOVER" on line 4b to explain the difference. All the records of this are in one place at Fidelity.

BTW, there's an interesting variation on this method that uses a Roth IRA... Do your normal Roth conversion and withhold whatever amount you want for taxes. Then repay that amount into the Roth within 60 days from taxable funds. This achieves the same result, but has one distinct advantage... it is not subject to the one-rollover-per-year limitation since it is a conversion.

 

[SecondCor521]

BTW, there's an interesting variation on this method that uses a Roth IRA... Do your normal Roth conversion and withhold whatever amount you want for taxes. Then repay that amount into the Roth within 60 days from taxable funds. This achieves the same result, but has one distinct advantage... it is not subject to the one-rollover-per-year limitation since it is a conversion.

Vanguard, my IRA custodian, does not support tax withholding from Roth conversions, at least not on the web page that I've always used.

 

[SecondCor521]

The IRS specifically states that withholdings are deemed to be timely payment of your estimated tax, regardless of the date of the withholding.

I think it's a little different, although this is an area that I think is rife with complexity.

The IRS says that withholdings are treated as made ratably throughout the year on the estimated tax payment due dates. See Form 2210 Part IV line 19 instructions.

If the pattern of your income is that you earned more in the earlier portions of the year, then you still could owe an estimated tax penalty.

Most people here probably have their income back-loaded towards the later portion of the year, so it typically isn't a problem.

 

[OldShooter]

... If the pattern of your income is that you earned more in the earlier portions of the year, then you still could owe an estimated tax penalty.

Most people here probably have their income back-loaded towards the later portion of the year, so it typically isn't a problem.

If the total estimated tax payment is the safe harbor amount paid by withholding any time during the year, your actual income during the year doesn't matter a whit. Pattern, total amount, ... nada. No point in even adding it up.

For example we just paid the safe harbor amount based on 2020 actual tax payments. I have drawn quite a bit from our IRAs this year for tax bracket management and will use the funds next year to make progress payments on a house we're having built. My estimate is that our actual federal tax due on 4/15 will be over $45K more than the safe harbor amount we just paid. No big deal, no penalty for underpayment.

There are two concepts getting mooshed together here, safe harbor amount and paying by withholding. They are really separate things. Maybe that is causing some of the confusion.

 

[Cobra9777]

If the total estimated tax payment is the safe harbor amount paid by withholding any time during the year, your actual income during the year doesn't matter a whit. Pattern, total amount, ... nada. No point in even adding it up...

+1

Income and withholding are both deemed to have been earned/paid equally throughout the year. You only introduce Form 2210 when you have uneven quarterlies that you need to prove matched up with income to avoid a penalty.

Vanguard, my IRA custodian, does not support tax withholding from Roth conversions, at least not on the web page that I've always used.

It can be done, but you have to call in. Fidelity does the same thing. They won't let you do it on the website without first trying to talk you into using separate non-retirement funds to maximize the conversion amount. Also if you're under 59.5, the amount used to pay tax will also be subject to the 10% penalty. So they want to make sure people are fully aware of those two things before proceeding. So again, it certainly can be done, but not without human intervention.

 

[SecondCor521]

If the total estimated tax payment is the safe harbor amount paid by withholding any time during the year, your actual income during the year doesn't matter a whit. Pattern, total amount, ... nada. No point in even adding it up.

For example we just paid the safe harbor amount based on 2020 actual tax payments. I have drawn quite a bit from our IRAs this year for tax bracket management and will use the funds next year to make progress payments on a house we're having built. My estimate is that our actual federal tax due on 4/15 will be over $45K more than the safe harbor amount we just paid. No big deal, no penalty for underpayment.

There are two concepts getting mooshed together here, safe harbor amount and paying by withholding. They are really separate things. Maybe that is causing some of the confusion.

Agreed, which is why I used the word "could" in what you quoted. One could owe an estimated tax penalty if a person both (a) did not meet the safe harbor, and (b) only had withholding (no estimated payments, and (c) had income front-loaded in the year.

I agree it is a confusing topic also.

 

[OverThinkMuch]

Does it matter when in the year I made such payments? In my individual situation for 2021 I made 75% of my income (mostly capital gains) in the third and fourth quarter. Does the IRS treat your annual income as made EVENLY thoughout the year?

Years ago I had an estimated payment penalty and looked into specifying which payments happened in which quarter... it's horrible. It was like doing your taxes 4 times, once per quarter. Unless tax software has greatly improved, I'd avoid it. But technically you can specify when your income, dividends and such happened during the year.

I'd suggest running tax software with what you know now, and getting an estimate of the penalty. You can also see how that changes with a July estimated payment or December.

 

[OverThinkMuch]

I don't have to hassle with mailing multiple checks with deadlines and wondering if they were properly credited, or with mucking around to pay on an unfamiliar web site.

IRS Direct Pay is pretty convenient for me. While I normally don't time it at the last minute, that's easier to do when uncertain mail delays are taken out of the picture. I get confirmation email about it, followed by the US Treasury withdrawal from my bank account.

 

[RunningBum]

Years ago I had an estimated payment penalty and looked into specifying which payments happened in which quarter... it's horrible. It was like doing your taxes 4 times, once per quarter. Unless tax software has greatly improved, I'd avoid it. But technically you can specify when your income, dividends and such happened during the year.

Perhaps it was your itemized deductions that caused a lot of the mess. Many more people take the standard deduction now, so that simplifies things.

You still have to show when income was earned, and that can be a lot of busy work, but the institutions should have a way to filter the income items you have to include.

The payments themselves, I don't see why that would cause a headache, if you use EFTPS. It's just one payment per quarter and you can see when your payments were made on that site.

Still, it's best to avoid if you can. I wouldn't fill out form 2210 if it was only going to save me from a $10 penalty, but I would for $100.

btw it's an tax underpayment penalty, not an estimated tax penalty. Just for clarity.

 

[OldShooter]

IRS Direct Pay is pretty convenient for me. While I normally don't time it at the last minute, that's easier to do when uncertain mail delays are taken out of the picture. I get confirmation email about it, followed by the US Treasury withdrawal from my bank account.

As you like. Using the tIRA withdrawal I don't have to have a username and pwd on a site I use once a year and I don't have to provide it with my banking information. The Schwab site is one I use frequently and am familiar with. I have never timed it but I am probably in and out of that transaction within 60 seconds.

 

[Perryinva]

Well, yet another thing learned here that I was not informed of by Fidelity! So I can just withhold the correct amount from the one tIRA conversion to Roth, and then simply transfer that same with held amount from a taxable account in to the Roth and be done with it?!? Why wouldn’t everyone just do that!?

 

[Cobra9777]

...Why wouldn’t everyone just do that!?

I think a lot of people just aren't aware of these other options. Or maybe they are aware, but don't mind overpaying in the first three quarters to cover a large 4th quarter conversion. Or maybe they don't mind filling out Form 2210. Or maybe they convert early in the year or throughout the year. Lots of different possible scenarios.

If anyone is interested, here's a very informative thread that discusses the pros/cons of these methods. I'll attempt to summarize here...

Assume late-Dec Roth conversion of $100K, which drives $22K of additional tax liability. The taxes will be paid from non-retirement funds to maximize the conversion amount.

1. Do the $100K Roth conversion. Pay $22K tax from non-retirement funds on the Jan 15 estimated tax due date. This is very straightforward. But in many cases, will result in a penalty for under-withholding unless Form 2210 is used, which can be a major PITA for some people.

2. Do the $100K Roth conversion. Do a separate tIRA withdrawal for $22K with 100% withholding. Repay the $22K within 60 days and report it as a tax-free rollover on your return. The withholding is deemed to have been spread equally throughout the year, avoiding penalties and the need for Form 2210. However, a tax-free rollover can only be done once per year per individual. But a couple filing MFJ can alternate each year to get around the limitation.

3. Do the $100K Roth conversion. Withhold $22K during the conversion transaction. Net conversion amount is $78K. To complete the conversion, replace the $22K in the Roth within 60 days from non-retirement funds. This achieves all the same benefits as #2. Also, it is not subject to the once-per-year limitation since it is a conversion, not a rollover. However, if done late in the year, with the $22K replaced in Jan of the following year, the entire $100K is taxable in the first year, while the 5-year holding period is based on the year of contribution, which might require some careful record-keeping.

After studying the linked thread last year, I decided to use #2. In part, because I couldn't actually find anyone who has done #3. But tons of people do #2 and the process is well-documented. Also, the separate tIRA withdrawal is for our ENTIRE safe harbor liability for the year. Not just the tax associated with the late-Dec conversion. We have two pensions but no withholding, and we do no quarterlies. It also avoids the potential record-keeping issues associated with 5-year holding period being different from year of taxation. Also, DW and I both have large tIRA balances, so we can alternate each year for a very long time, which easily avoids the once-per-year limitation per individual.

Sorry for the long post. But I think this is one of the more interesting topics that I've learned about on this forum. So I thought I'd try to summarize what I've learned from multiple earlier threads and other sources.

 

[SecondCor521]

^ Some comments:

[A caveat though - I think withholding and estimated taxes are a topic that is moderately complicated and very frequently misunderstood. Including quite possibly by me.]

First, I think (but am not 100% certain) that if one meets a safe harbor, there is no need for Form 2210. So I don't think the downside of #1 ("In many cases") actually exists. It also makes the middle sentence in #2 ("avoiding penalties and the need for Form 2210") generally inaccurate.

Second, the only benefit to approach #3 seems to be you get to avoid using EFTPS or DirectPay, which doesn't seem like much of a benefit to me...why not just send the "replacement $22K" as withholding in the first place.

Third, a problem exists for people under 59.5 with #3 - the $22K withholding is not part of the conversion and could result in early withdrawal penalties on that amount.

@Cobra9777, what do you mean by "It also avoids the potential record-keeping issues associated with 5-year holding period being different from year of taxation."?

 

[Out-to-Lunch]

EDIT: I typed this up before the most recent two posts by Cobra and SecondCor, so I did not realize that I was treading on some ground that they just covered. My questions still stand, however.

Well, yet another thing learned here that I was not informed of by Fidelity! So I can just withhold the correct amount from the one tIRA conversion to Roth, and then simply transfer that same with held amount from a taxable account in to the Roth and be done with it?!? Why wouldn’t everyone just do that!? (Emphasis added)

Good question! Maybe I should do it this way. But I would like to ask the group a question regarding my eligibility. (I may have a mechanics question later.)

My situation: I am not yet 59.5, and I would like to do Roth conversions of about $50k this year. I want to pay the incurred taxes of ~$11k from a taxable account. My withheld income to date is NOT enough to meet any safe harbor threshold. Based on this thread, I think there are three options, but I am uncertain of eligibility:

1. Convert $50k from tIRA to the Roth, pay 1040-ES estimated taxes (~$11k) from taxable, and file Form 2210. (I am pretty sure that I can do this.)

2. Convert $50k from tIRA to Roth. Separately, take an $11k distribution from tIRA, specifying 99% withholding. Then contribute $11k from taxable to tIRA within 60 days as a "rollover." But I don't think I can do this, because I have done a rollover (457 -> tIRA) a few months ago.

3. Convert $50k from tIRA to Roth, allowing $11k to be withheld. Later, contribute $11k from taxable to Roth within 60 days as a "conversion." The eligibility question arises because that $11k would constitute an early distribution from the tIRA for me, and I would owe 10% penalty on it. Would that penalty "go away" when I made the later contribution to top off the conversion?

Of course, I have been trying to answer this myself by looing at irs.gov publications. I think I can do option 3, but not quite convinced...

 

[Cobra9777]

...First, I think (but am not 100% certain) that if one meets a safe harbor, there is no need for Form 2210. So I don't think the downside of #1 ("In many cases") actually exists. It also makes the middle sentence in #2 ("avoiding penalties and the need for Form 2210") generally inaccurate...

No. If you had income throughout 2021, and made one payment on Jan 15, 2022 to meet safe harbor, you will still owe penalties for under-withholding in 1Q-3Q 2021. Even if all your income was from a Roth conversion in 4Q 2021, you would still owe the penalty UNLESS you file Form 2210 to prove that your profile of income and withholding matched by quarter.

...Second, the only benefit to approach #3 seems to be you get to avoid using EFTPS or DirectPay, which doesn't seem like much of a benefit to me...why not just send the "replacement $22K" as withholding in the first place...

No. The main benefit of #3 is same as #2, i.e. withholding that is deemed to have been spread equally throughout the year. The additional benefit of #3 (over #2) is that it's not subject to the once-per-year limitation since it is a conversion, not a rollover. There is no use of EFTPS or DirectPay using #2 or #3. Everything is transacted at your brokerage/custodian.

...Third, a problem exists for people under 59.5 with #3 - the $22K withholding is not part of the conversion and could result in early withdrawal penalties on that amount...

True. I mentioned that in post #32 above, but I should have also listed that here as a "con" for #3.

...@Cobra9777, what do you mean by "It also avoids the potential record-keeping issues associated with 5-year holding period being different from year of taxation."?

I explained this under #3...

...if done late in the year, with the $22K replaced in Jan of the following year, the entire $100K is taxable in the first year, while the 5-year holding period is based on the year of contribution, which might require some careful record-keeping...

But it might be helpful to read Alan S's explanation in the linked fairmark thread, which is probably clearer than my mine.

 

[SecondCor521]

My situation: I am not yet 59.5, and I would like to do Roth conversions of about $50k this year. I want to pay the incurred taxes of ~$11k from a taxable account. My withheld income to date is NOT enough to meet any safe harbor threshold. Based on this thread, I think there are three options, but I am uncertain of eligibility:

1. Convert $50k from tIRA to the Roth, pay 1040-ES estimated taxes (~$11k) from taxable, and file Form 2210. (I am pretty sure that I can do this.)

2. Convert $50k from tIRA to Roth. Separately, take an $11k distribution from tIRA, specifying 99% withholding. Then contribute $11k from taxable to tIRA within 60 days as a "rollover." But I don't think I can do this, because I have done a rollover (457 -> tIRA) a few months ago.

3. Convert $50k from tIRA to Roth, allowing $11k to be withheld. Later, contribute $11k from taxable to Roth within 60 days as a "conversion." The eligibility question arises because that $11k would constitute an early distribution from the tIRA for me, and I would owe 10% penalty on it. Would that penalty "go away" when I made the later contribution to top off the conversion?

Of course, I have been trying to answer this myself by looking at irs.gov publications. I think I can do option 3, but not quite convinced...

1. Yes, you can do this. However, it is my understanding and belief that if the $11K tax payment enables you to reach any of the several safe harbors, you would not be required to file Form 2210.

2. Yes, you can do this. The once per 12 months limitation only applies to IRAs; it does not apply to plan-to-IRA rollovers per https://www.irs.gov/retirement-plan...vers-of-retirement-plan-and-ira-distributions. But double-check with your qualified tax advisor, of course.

3. Provided that the top off transaction happened in the requisite time period and you reported it in your tax software correctly, I believe the 10% penalty would go away.

I will add at this point that I think that the various "withholding tricks" are cool but the necessity of them is overblown. The only reason I can see to bother with them (in this case with options 2 and 3 rather than the straightforward option 1 above) is if ALL of the following are true:

A. You won't meet any of the safe harbor amounts.
B. Any estimated tax payments fall later in the year than your income does.
C. You don't want to fill out Form 2210 to minimize your underpayment penalty.
D. The underpayment penalty is significant to you.

 

[Perryinva]

Well, I had another conversation with Fidelity and things have changed again for me. If you take withholding from the conversion you can not simply transfer the withholding amount in to the Roth account as a conversion to pay the tax with after tax funds, after the fact. That would be considered a contribution. (Duh) The easiest way is to do the conversion with 0 taxes taken out, then take a second distribution equal to the known withholding amount from an after tax account (brokerage etc) and simply have THAT distribution set for 100% withholding. Taxes are then paid with after tax cash.

By far the easiest way to do it all within Fido.

However, I also realized it would be foolish to take my conversion amount up to the first IRMAA level as planned ($172k), because then I would forfeit our $2800 simulus rebate completely. It only makes sense to convert this year to $150k, and retain the full $2800. So I will convert $22k less. Oh well.

 

[rayvt]

...
A. You won't meet any of the safe harbor amounts.
...
D. The underpayment penalty is significant to you.

If you are getting paycheck income your withholding on the paycheck is probably close to the correct withholding FOR THE PAYCHECKS. A large tIRA withdrawal or Roth conversion late in the year will blow that out of the water.

If you are retired and want little or no withholdings from pension/SS it is very convenient to have just one large withholding that covers your safe harbor amount.

Basically, you need a withholding because that's the only simple way to get to the safe harbor in one fell swoop, without having to mess with quarterly payments or that 2210 form.

Additionally, you'd perhaps like to pay the withholding from your regular taxable account instead of your tIRA. But you can't do a withholding from a taxable account withdrawal, only from a tIRA withdrawal.

Secondarily, paying the withholding with tIRA money adds it to your taxable ordinary income, but paying it (albeit indirectly) from a taxable account you only get hit with capital gains tax--and then only on the amount above the basis.

 

[Out-to-Lunch]

Thank you so much!

1. Yes, you can do this. However, it is my understanding and belief that if the $11K tax payment enables you to reach any of the several safe harbors, you would not be required to file Form 2210.

I have since filled out a dummy Form 2210. I will be nowhere near meeting any safe harbor amounts. (As rayvt implicitly notes, only withholding and regular, timely, quarterly estimated payments count for much.)

2. Yes, you can do this. The once per 12 months limitation only applies to IRAs; it does not apply to plan-to-IRA rollovers per https://www.irs.gov/retirement-plan...vers-of-retirement-plan-and-ira-distributions. But double-check with your qualified tax advisor, of course.

Wow, this is news to me! I thought the restriction was on all "rollovers." In addition to your note about plan-to-IRA rollovers not counting, apparently direct (trustee-to-trustee) rollovers are not, in fact, "rollovers." Thanks for that information!

3. Provided that the top off transaction happened in the requisite time period and you reported it in your tax software correctly, I believe the 10% penalty would go away.

I will add at this point that I think that the various "withholding tricks" are cool but the necessity of them is overblown. The only reason I can see to bother with them (in this case with options 2 and 3 rather than the straightforward option 1 above) is if ALL of the following are true:

A. You won't meet any of the safe harbor amounts.
B. Any estimated tax payments fall later in the year than your income does.
C. You don't want to fill out Form 2210 to minimize your underpayment penalty.
D. The underpayment penalty is significant to you.

Yes, I think I will just file 2210 this year. Doesn't seem too onerous.

Thank you so much for analyzing my situation with knowledgeable eyes.

 

[Perryinva]

Rayvt says: “ additionally, you'd perhaps like to pay the withholding from your regular taxable account instead of your tIRA. But you can't do a withholding from a taxable account withdrawal, only from a tIRA withdrawal.”

Why do you say that? That is not what Fidelity said at all. In fact, that is exactly how they recommended paying taxes for the Roth conversion; via a distribution from a taxable account such as a brokerage account and specify 100% withholding.

 

[SecondCor521]

Why do you say that? That is not what Fidelity said at all. In fact, that is exactly how they recommended paying taxes for the Roth conversion; via a distribution from a taxable account such as a brokerage account and specify 100% withholding.

I'm puzzled why Fidelity (or any brokerage) would offer withholding on a withdrawal from a taxable account. Withdrawals from taxable accounts generally don't result in the creation of taxable income. Withholding in all the other cases I can think of is because the related transaction (a paycheck or a Roth conversion) creates taxable income.

 

[Perryinva]

I asked the exact same thing. I have not actually done the conversion yet, but apparently since any earnings in the taxable account are taxable, they offer the option for withholding. Once the deposit I made to the brokerage account clears, I will be doing it and see. In fact, I may initiate the withdrawal from the brokerage first and make sure that is actually an option before doing the conversion. He was quite positive that that is how they recommended after tax FIT payments.

 

[Cobra9777]

Rayvt says: “ additionally, you'd perhaps like to pay the withholding from your regular taxable account instead of your tIRA. But you can't do a withholding from a taxable account withdrawal, only from a tIRA withdrawal.”

Why do you say that? That is not what Fidelity said at all. In fact, that is exactly how they recommended paying taxes for the Roth conversion; via a distribution from a taxable account such as a brokerage account and specify 100% withholding.

I just had a long call with my Fidelity PCG rep. There is no way to do withholding in conjunction with a withdrawal from a regular taxable brokerage account at Fidelity. Same for CMAs or any other non-retirement account. It cannot be done online NOR with help from a rep. It's just not allowed. Only withdrawals from retirement accounts can have withholding.

Either you, or the rep you spoke to, misunderstood.